The FT's Alphaville (which is free to access) featured a discussion on modern monetary theory yesterday. The key part was this (and I make no apology for quoting at length: this is in the public interest):
Allow us to grossly simplify. Advocates for modern monetary theory argue that, for a sovereign country with its own currency, there is no inherently unacceptable level of government debt – that country does not automatically begin to collapse when debt reaches 90 per cent of GDP, or even 200 per cent of GDP. The country appropriates what it believes is necessary for domestic programs, regardless of revenue.
A traditionalist would see this as a prescription for inflation: increase the supply of money and, as with any commodity, you reduce its value. Modern monetary theorists argue that inflation happens only when the real economy – plants, machines, workers – can't absorb what the government is spending. So: disconnect spending from taxation. Spend until the economy is at capacity, using all of its resources perfectly. Raise taxes only to cool down inflation, when the real economy exceeds that capacity.
Alphaville does not propose here to mount an extensive defense of modern monetary theory. There is not the space. (Will there ever be?) We are confident, however, that Howard Dean is correct. It is neither Marxist, nor is it bullshit.
Modern monetary theory is simply a different way of looking at fiscal policy, a way of describing what the real-world constraints on spending look like. It is in fact very close to how people in Washington, D.C. already approach spending. Again, we're not talking about what they say. Rather, we're talking about what they do.
This is the key point about MMT, about which I will have more to say soon. There are far too many in the MMT community who say it requires job guarantees, or that we leave the EU and that it leads to lands of bliss and honey. It might, but MMT does not say those things. They are people's interpretations of it. WHat MMT actually says is simply, as the FT notes:
a different way of looking at fiscal policy, a way of describing what the real-world constraints on spending look like.
Much of the rest can be taken or left, at will. Because it is not MMT. As I have said before.
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Encouraging to see this from the FT. Perhaps they could be persuaded to follow up with several educational articles to educate and answer the question “how will you pay for this.” It seems there might be hope after all?
It’s just what’s needed. A steady drip feed of articles and talks from relatively respected sources. No point in frightening the horses.
Yep. I like your thinking.
That is encouraging. Of course I’d add that it’s not just government spending that can lead to inflation – private sector lending can and does do exactly the same. E.g. UK housing market.
I also agree that the MMT movement needs to clearly separate what absolutely already is (core MMT description of macroeconomic reality) from policy ideas that arise from it (full employment via job guarantee, green new deal etc).
Indeed the policy choices of our existing neoliberal establishment could easily be reframed via MMT and would be just as much policies that arise from and are possible in our macroeconomic reality – you just wouldn’t see many MMT enthusiasts pushing such policies because most MMTers are progressives on the centre left or radical left.
It would do everyone a favour if people across the entire political spectrum learned how our macroeconomy actually works, cease pretending it works in some other way for narrow political gain and instead discussed the full breadth of policy options available to us so that democracy could actually be allowed to function properly.
On the subject of MMTers’ beliefs about Brexit: there are few people on the planet more implacably opposed to the EU nor more doubtful of the possibility of its reform than Bill Mitchell yet even he admits there’s a very real possibility that a disorderly brexit with libertarian nutjobs at the helm will likely be an unprecedented economic disaster.
The last thing we need is yet more idealogues – MMT idealogues included. Understanding MMT can help in the same way that understanding science can help. People just have to realise that understanding reality doesn’t guarantee a good outcome for all nor, in this age of impending climate catastrophe, a good outcome for anyone. We have to understand reality the best way we can now based on the existing evidence and thinking but keep open minds so we can alter our model of reality to fit new evidence as it emerges.
Really MMT, like science, grants knowledge but the wisdom required to take the best course of action requires something more.
You last sentence is very true
Well yes, the last sentence; but I really like “understanding reality doesn’t guarantee a good outcome”; ooh, and: “We have to understand reality the best way we can now based on the existing evidence and thinking but keep open minds so we can alter our model of reality to fit new evidence as it emerges”. Not perhaps the most accoomplished expression of the idea; but you catch the drift; and, the “best way we can”; I like that. Oh, and definitely, “The last thing we need is yet more idealogues — MMT idealogues included”. I have no argument with that. Think how wonderful it would be – a world without ideologists.
Use what works; but suppose everything is contingent; especially the theory you happen to be relying on. There will be a better one along, sooner or later.
Adam,
Is it the EU that Bill Mitchell is “implacably opposed to” or is it the Eurozone. I thought it to be the latter.
It is both
It sounds like the prodigal son, let’s forgive the FT it’s past errors and welcome it, or at least Alphaville, into the 21st century. But has the rest of the FT admitted the errors of its past, such as it’s support for Osborne and his attack on the citizenry via austerity? Will the FT support the Green New Deal and explain “how it can be paid for” courtesy of Alphaville’s sudden conversion?
Even the old fogey teenage scribblers are scrambling aboard:
https://www.economist.com/finance-and-economics/2019/01/17/economists-reconsider-how-much-governments-can-borrow
🙂
“Again, we’re not talking about what they say. Rather, we’re talking about what they do.”
This has always seemed to me the essence of MMT. Notice that this is not prescriptive, but descriptive; descriptive of what people actually do, not simply what they claim to be doing. As we know (from Brexit, from the Financial Crash etc., etc) policy makers very often do not understand what they are doing; embarrassing perhaps, but just a fact.
FT Alphaville can be quite good at times. Especially of late.
Regarding the comment that FT Alphaville should run a segment on how the government can pay for it, see
https://www.forbes.com/sites/johntharvey/2019/01/16/but-can-the-government-afford-it/#2a39fb6f22d9
Indeed….
Brendan Greeley:
Modern monetary theory has the least Marxist origin story of any concept in the history of human thought. According to Warren Mosler, credited with inventing it, the idea came “after spending an hour in the steam room with Don Rumsfeld at the Racquet Club in Chicago.”
Like, wow.
That was ridiculous….
Very amusing Magpie, ‘got a link or reference for that?
@Marco Fante (January 18 2019 at 2:20 pm)
Very amusing Magpie, ‘got a link or reference for that?
Yes, I do have a link. It’s the same Alphaville link Richard included in the first line of his post. You only need to scroll down to the bottom of the Alphaville article.
Cheers.
[…] Bill is an undoubted liability to the necessary rethinking of how government really funds itself, which is what MMT is in essence all about. This is for three […]
How about discussing which countries are already below, at or beyond their economic capacity?
Let’s discuss the measurement of our economic capacity and apply that formula to a few countries so we can see the extent to which MMT should influence economic policy.
And let’s discuss what gives the biggest bang for the created buck? Better education, automation, infrastructure or healthcare?
Let’s get beyond the fighting the “MMT is a cult” accusations.
“beyond their economic capacity?”
That’s an interesting notion. I’m not sure how they would acheive that. As for those nations that are “below” their economic capacity you could start with everyone that has sub-target inflation levels, ultra-low interest rates and continuous unemployment, which would be most of the Western world.
Indeed